Tuesday, 28 February 2012

The Supreme Court in Madras Industrial Investment Corpn. Ltd. v. Commissioner of Income-tax (1997) 225ITR802 held that ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year.The scheme of s. 35 of the Income tax Act, 1961 provide for deduction upto 200% for research and development expenditure irrespective of whether capital or revenue in nature. However market research and promotional expenditure fall outside the ambit of R&D deductions so that these have to be claimed u/s 37. Unlike research and development costs that are usually charged to expense in the period in which they are incurred due to uncertainty as per Accounting Standard 8, market research and initial promotional expenditure are seen as deferred and often labelled as deferred revenue expenditure in the accounting books and amortized over a certain number of years. Further for tax purposes these expenses are claimed as 100% deductible citing reason that the period over which the benefit would accrue is not known to the assessee. Further support is taken in this regard from the decision of SC in Madras Industrial Investment case (supra).

In the latest in Asstt CIT v. Kopran Ltd. in ITA Nos. 67 & 68/2009 dated 20.12.2010 the assessee is found to have launched new products and incurred heavy advertisement expenditure. Further the assessee by way of note in the computation of income stated that during the year it has incurred expenses on promotion of new products and brands amounting to little over Rs. 16 crores, which had been treated as deferred revenue expenditure in the books of account and amortized for a period of six years but while computing the taxable income, these expenses are claimed as deduction as these expenses are revenue expenditure in nature. It was explained by the assessee that the expenses shown as deferred revenue expenditure are incurred for the promotion of new products/brands, advertising research development expenses for the development of new products and that these expenses mainly comprised of cost of raw material, cost of advertising and expenses incurred for the promotion of the products. If was also submitted by the assessee that in accordance with the consistent accounting policy, these expenses are shown as deferred revenue expenditure and same are fully deductible in computation of business income because the expenditures are revenue in nature and there is no bar on claiming deduction of expenses merely because these are shown as deferred revenue expenditure in the books of account.

The CIT(A) referred to the Hon'ble Supreme Court judgment in the case of CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549, wherein, it is held that the expenditure of revenue nature is allowable in full in the computation of the profits in the year in which liability has crystallized.

The ITAT in rejecting the appeal of the revenue held that the period for which the assessee can be said to have secured benefit by incurring expenditure cannot be reasonably estimated. The undisputed fact is that the new products launched may fail to take off in the year of launch itself may have a long life as a product. There is no way in which it can definitely be estimated that the benefit of the expenditure would last for a particular period of time. And on this count the ITAT upheld the tax treatment followed by the assessee.

The assessee in this case is perhaps engaged in pharmaceutical business and marketing various products. The pharmaceutical industry is regulated by the Drugs and Cosmetics Act, 1940 and Drugs and Cosmetics Rules, 1945. Under such Act the manufacturer of a drug is required to obtain a marketing approval for each drug developed which is generally for 5 years. There is no reference to any product marketing approval in this case much less any reference to the business of the assessee so that the facts in this case are not dealt in impeccable manner. Further the bench proceeded on the basis of a previous decision in Amar Raja Batteries Ltd. v. Asstt. CIT [2004] 85 TTJ (Hyd) 20/91 ITD 280 (Hyd.) The fact that in the present case there is a scheme for statutory approval for marketing of drugs is otherwise a reason enough to record allowance of deduction over a period of five years on the basis of ratio of Apex Court decision in Madras Industrial Investment Corpn. Ltd. v. Commissioner of Income-tax (1997) 225ITR802 of which is found in the order.

In the right earnest the SC decision is not taken to its entirety as the Apex Court empathetically put the onus upon the assessee to the treatment of expenditure on the basis of given set of facts. Now where the assessee make a disclosure in the accounting policy sheet that the nature of expenditure require deferment over so many years speak for itself that the deduction is not claimable in one year. The adjustment in the income computation subsequent to making of accounts is contrary to what is stated by the Supreme Court in Madras Industrial case (supra). The words “however the facts may justify an assessee” through upon the onus on the assessee so that once he adopts a method of treatment in accounts the same cannot be reversed at the time of making of computation of income. The Supreme Court decision as such did not provide any right to the assessee for any adjustment in the computation so to say but rather put a bar on a claim for deduction when the assessee itself so describe it as deferred revenue expenditure.

Thus once the assessee categorise an expenditure as ‘deferred revenue expenditure’ and amortize the same in the accounts it cannot be adjudged as expenditure allowable in entirety in the year in which it is incurred but compulsorily need to be allowed over the period it is spread out.